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Friday, 15 November 2013

UK: Osborne sukuks up to Islamic finance

Ensuring that the sukuk are watertight in their compliance with sharia will be the acid test for the Chancellor.

The government could soon issue its first taxpayer-guaranteed sukuk, marking the UK’s entry into the lucrative, rapidly expanding market of Islamic finance, which was until now exclusive to Muslim countries. But what are sukuk and why are they important?

Sukuk (plural of ‘sakk’) are essentially government bonds that must comply with the moral code and religious law that comprises sharia (as any part of the holistic system of Islam must). This word will probably generate some trembling articles in the right-wing press, but sharia’s main stipulation in terms of finance is simply a ban on riba (interest). Since Islam sees money as a pure measure of value, and not a profitable asset in and of itself, the charging of interest on money is haram (forbidden). In lieu of interest, the issuer of a sukuk (in this case, the UK government) sells an investor or group the bond, who then rents it back to them for an agreed-upon rental fee. The issuer also signs a contract promising to buy back the bonds at a future date at par value. Sukuk are traded on 'real' assets, not risk and futures.

The first sukuk (which translates as 'cheques' or 'certificates') proposed by Osborne would only be valued at £200m, a miniscule amount in the context of the total Islamic finance market (currently valued at around £750bn and expected to double in value by 2017 according to the 2012 Global Islamic Finance Report), leading Jonathan Guthrie in the Financial Times to call it little more than an "amuse bouche". Issuing them is not about to end Britain’s economic woes with a tide of oil money from the Gulf.

Sukuk are at this stage a marketing tool: a gesture to the Muslim world that London is open for business. Whoever you are, we’ll suit your conditions (if you have cash). Osborne wrote an article to this effect in the FT last week, stating his ambition for London to be "the unrivalled western centre for Islamic finance". It would make Britain the first non-Islamic country in the world to issue sovereign sukuk, joining Egypt, Malaysia, Kazakhstan, Qatar and Turkey. As London is already a global finance capital whose stock market dwarfs those of all these other countries put together, the potential for growth in a new sector of culturally-sensitive investment funds (another example would be green investment) is not to be underestimated.

But ensuring that the sukuk are watertight in their compliance with sharia will be the acid test for Osborne. If they’re not, they are rendered pointless and a huge waste of time and money. In the winter of 2011, Goldman Sachs proposed to debut a $2bn sukuk al marabaha (deferred payment) program, but it was judged non-sharia compliant and was aborted, causing a lot of red faces in some quite altitudinous boardrooms. Since sharia works horizontally rather than hierarchically – that is, fatwas (judgements on points of sharia) can be issued by anyone with the recognised Islamic qualifications and then debated on equal terms – scholars can often differ irrevocably on the finer points.

But even in the event that the government’s sukuk are eagerly snapped up, it is not going to revolutionise our financial relationship with the Islamic world. London is already a piggy bank for the world’s elite, whatever their religion, because, as Michael Goldfarb recently argued in the New York Times, skyrocketing prices and a tax law which is only able to skim British earnings mean that London property has now all but become a "global reserve currency" – a sort of hyper-money only accessible by the global super rich, most of whom don’t live here and don’t intend to.

And as the New Statesman has already shown, the Middle East in particular has been enthusiastically pouring cash into the UK (well, London) for the past decade anyway. Qatar alone owns 95% of the Shard, Harrods, over a quarter of Sainsbury’s, a fifth of the London Stock Exchange itself, the Chelsea Barracks, the Olympic village, 20% of Camden market, No. 1 Hyde Park (the world’s most expensive block of flats), and the US embassy building.

So if Osborne’s sukuk have a successful debut, it will herald a greater level of fiscal openness and consensus between the Islamic world and Britain, and it will make it easier for some of Britain’s own 2.7 million Muslim citizens to decide upon halal (permitted) domestic investments. As far as Treasury policy can be, this is socially inclusive. But that’s about it. Even in the case that a new enthusiasm for religiously-influenced investment boosts GDP, as each day passes we see that the previously accepted link between GDP and living standards has all but dissolved anyway.

It is highly unlikely this policy will make a difference to the life of the average British Muslim, and issuing a few culturally-catered bonds will not even begin to address the rampant inequality and instability of a British economy increasingly leaning on the crutch that is the trickle-down of elite foreign capital. The extent to which Osborne’s financial policy adheres to the central Islamic idea of maslaha (public interest) is, to put it mildly, up for debate.